Russian airlines: feeling the crisis
What a difference a year can make!
If 2013 was a year for optimism in the Russian airline industry, with double-digit passenger growth figures and carriers embarking in ambitious fleet expansion programmes, the panorama could not be more different one year later.
The second half of 2014 has been quite tough for Russian airlines. The country's economic situation has worsened considerably amidst the financial side-effects effects of the conflict in the Ukraine and subsequent Western sanctions as well as the plunging oil price, a circumstance that is often positive for the airline industry, but most definitely not when the prosperity of the country depends on it.
To be clear, growth had been so strong in the last few years that there might be still some inertia, passenger numbers have still increased by 10.5% in the first 11 months of the year. For example, Aeroflot, Russia's largest airline, has reported similar figures, with passenger numbers up 9.9%, a rise driven mostly by domestic routes, since its international traffic fell by 2.3%.
It must be taken into account that, although the economy, and the value of the currency, has been deteriorating progressively during the last year, it was not been until December that the ruble suffered its most spectacular drop in value, a situation that suddenly placed some Russian airlines under almost unbearable pressure.
The squeeze comes from two sides:
The prospect of deteriorating market conditions. True, traffic numbers might have held up so far, but must be taken into account that most Russians book their holidays through agents well in advance of travel dates, therefore airlines must have sold most of their capacity up to this last holiday season well before the most serious trouble with the ruble started. This might not be the case anymore though, as most Russians, particularly the middle and upper-middle classes are starting to feel the combination of inflation, an stagnating economy and the unfavourable exchange rates, that might prevent many of them from vacationing abroad.
The other effect is that those airlines that had financial obligations denominated in foreign currencies, and here Transaero and UTair stand out, have found themselves suddenly with their backs against the wall and in need of requesting financial relief. We are not talking about small concerns here, Transaero is the second largest Russian airline (and the first privately owned) whereas UTair is the third largest, and it provides essential service in many isolated areas of Siberia.
In December Transaero received emergency help from the government, in the form of loan guarantees and a 9B ruble credit line channeled through state-owned bank VTB. This support arrived after it hinted that it might have to stop flying before the end of the holiday season in case it could not reach an agreement with its creditors. As a sign of gratitude, Transaero has frozen domestic airfares during 2015.
Another emergency measure considered by the government, although not sign yet of it having been approved, is the provision of subsidies to cover interest rate expenses related to aircraft leasing and using route subsidies as a way to support airlines.
The other airline that has found itself in a, possibly, even more delicate situation is UTAir. A striking reversal of fortunes, since only a few months ago UTAir was busy expanding capacity with a fleet of brand-new Airbus aircraft and was even considering an ambitious scheme to re-develop a former military airport as a low-cost base base to serve the Moscow area. Yet, the siberian airline is now being harassed by its creditors and has just announced it is stopping service to eight different cities across Russia in order to try to stop losses.
But we will get back to UTair shortly on another post. Watch this space!